The video game industry was estimated to be worth $182 billion in 2022, according to Newzoo. That's a large enough market for the top game companies to find ways to grow over the long term.
However, some top gaming brands don't get the attention they deserve, despite making some of the most played games in the business. That said, here's why the market might be severely undervaluing two of them: Nintendo (NTDOY 3.03%) and Ubisoft Entertainment (UBSFF 7.13%) (UBSFY 0.87%).
1. Nintendo
Nintendo is one of the classic gaming brands in the video game industry. The Japanese gaming company is known for many popular franchises, such as Zelda and Mario Bros., but it's been a rough couple of years for the industry. After a spike in the number of people playing games during the pandemic, Nintendo and other leaders have experienced revenue pressure as many of those players put down their controllers.
Total video game sales were estimated to fall 5% in 2022, according to Newzoo. Nintendo reported in line with that figure, with total net sales down 5.5% in fiscal 2023 ending in March.
The video game industry has been on a long-term upward trajectory for decades, so now is the time to consider buying the leaders, especially as Nintendo could be on the verge of a comeback.
The recent release of Legend of Zelda: Tears of the Kingdom sold 10 million copies in the first three days. Moreover, Nintendo had a very successful launch of the Super Mario Bros. Movie, which has earned $1.3 billion globally at the box office.
In the fiscal fourth-quarter earnings report, management noted that the response to the movie is already carrying over to higher sales of Mario-related merchandise and classic Mario games available through the Nintendo Switch Online subscription service.
The strong sales of the new Zelda game and strong attendance for the Mario movie are good signs for Nintendo's future. It still has tremendous value in its top gaming brands, while the stock is trading at a modest price-to-earnings ratio of 14. At this discounted valuation, the market is not fully appreciating what Nintendo is capable of over the long term.
2. Ubisoft Entertainment
Another top gaming brand that gamers are very familiar with but may not get enough attention on Wall Street is France-based Ubisoft Entertainment. The company makes several of the industry's best-selling titles. Assassin's Creed, Rainbow Six, and The Division have been supported with ongoing releases and updates for years, and continue to drive significant revenue for the company.
Like others in the industry, Ubisoft hasn't escaped sluggish sales over the last few years. But the stock is deeply discounted right now, as the company hasn't weathered the weak environment as well as its U.S.-based counterparts like Activision Blizzard and Electronic Arts. Ubisoft stock trades at a massive discount to its competitors on a price-to-sales basis, but upcoming releases and management's fiscal 2024 guidance suggest a possible turnaround.
Data by YCharts
After reporting weak sales over the last two years, management is now calling for top-line growth for fiscal 2024 ending in March. The improved sales outlook will be supported by a compelling lineup of new releases, in addition to ongoing sales of its existing games.
On that note, development of upcoming games are going well. The company is scheduled to release a new Assassin's Creed title in October. Although there is no official release date yet, the company is also working on a Star Wars action-adventure game, which could be a huge sales driver.
Of course, the risk with new releases is that they don't perform to expectations. But that's why it's a good strategy to buy video game stocks when they are on sale, since the lower valuation better tilts the risk-to-reward proposition in investors' favor.
With the stock trading 76% off its previous highs, the potential upside as management focuses on delivering profitable growth could deliver a market-beating return.
If you're interested in video game stocks, Nintendo and Ubisoft are worth considering for the long-term value of their top franchises, which the market seems to be undervaluing right now.
